Team No Comments

Why oils, metals and banks hold the key to the FTSE 100 in 2022

Please see below, an article from AJ Bell examining the key determinants of the FTSE 100 performance in 2022 – received late yesterday afternoon – 16/01/2022

The FTSE 100 is up by around 10% over the past 12 months, and it is now trading within a couple of percentage points of the all-time closing high of 7,878 reached back in May 2018. Vaccinations, an end to lockdowns (in England, at least), ultra-loose monetary policy from the Bank of England, fiscal support from the Government, and a global economic recovery are all possible reasons for the headline index’s steady advance from the pandemic-induced panic low of 4,994 in March 2020.

“The question now is if catalysts are required for the FTSE 100 and UK equities to make further gains, and the sort of advances which justify exposure within the realms of a balanced asset allocation.”

But advisers and clients must look forward when they plan portfolios, not backwards, so the question now is if catalysts are required for the FTSE 100 and UK equities to make further gains, and the sort of advances which justify exposure within the realms of a balanced asset allocation.

Dividend payments are one possibility. A prospective yield of 3.9% for 2022 from ordinary dividends, with the prospect of further special payments on top, may appeal to some, although with UK headline inflation running at 5.1%, according to the consumer price index, that part of the investment case for the FTSE 100 and UK equities looks less enticing than it once did.

Merger and acquisition activity is another. Over 70 UK quoted firms received bids in 2021 and two FTSE 100 firms were acquired: insurer RSA (in a deal that was announced in 2020) and grocer Morrisons. Overseas buyers snapped up both and a pound that has failed to regain its pre-Brexit poll levels from 2016 may have had a role to play here, as it made these assets look cheaper to euro- and dollar-denominated buyers.

Bid activity suggests there is value to be had, but value still needs something to happen to crystallise it. And perhaps that takes us on to earnings momentum.

Go with the flow

The good news is that earnings momentum remains positive for the FTSE 100 as analysts continue to increase their profit estimates.

“The good news is that earnings momentum remains positive for the FTSE 100 as analysts continue to increase their profit estimates. The less good news is that aggregate profits growth for the index is expected to slow to a virtual crawl following 2021’s rebound.”

Aggregate earnings forecasts for the FTSE 100 in 2022 and 2023 continue to rise

Source: Company accounts, Marketscreener, analysts’ consensus forecasts

The less good news is that aggregate profits growth for the index is expected to slow to a virtual crawl following 2021’s rebound. Not all of the numbers are in yet, but total pre-tax profits for the FTSE 100 are expected to have doubled in 2021. While it is unrealistic to expect such a torrid pace to continue, advisers and clients could be forgiven for looking askance at estimates which look for 6% profits growth in 2022 and just 1% in 2023.

Aggregate earnings growth for the FTSE 100 is expected to slow dramatically in 2022 and 2023

Source: Company accounts, Marketscreener, analysts’ consensus forecasts

A matter of mix

The reason for this sudden go-slow lies largely with the FTSE 100’s mix of constituents. Without wishing to be too pejorative about it, the index is largely made up of the unpredictable (oils and miners), the indigestible (banks and insurers) and the downright stodgy (utilities, telecoms and to a lesser degree pharmaceuticals). A racy mix it is not, at least in the low-growth, low-inflation, low-interest-rate environment that has dominated for the past decade or more.

The FTSE 100 is heavily slanted towards miners, financials and oils

Source: Refinitiv data, Marketscreener, analysts’ consensus forecasts

But even here may be where opportunity lies because there is just the chance that the environment is changing. Markets are no longer preoccupied with where inflation has gone and how low interest rates could go, but where inflation could peak and how high interest rates may have to go to rein it in.

“Markets are no longer preoccupied with where inflation has gone and how low interest rates could go, but where inflation could peak and how high interest rates may have to go to rein it in. In this environment, the FTSE 100 could come into its own.”

In this environment, the FTSE 100 could come into its own. It has underperformed in the world stage since the Brexit vote (if not before). Underperformance can mean unloved and unloved can mean undervalued, at least from a contrarian’s perspective. And undervalued is always a potentially interesting starting point, with the FTSE 100 looking decent value relative to its own history on around 13 times earnings for 2022.

Granted, its unusual, or at least distinctly twentieth-century, earnings mix (lacking in technology, abundant in commodities) may mean the FTSE 100 deserves a low rating relative to international peers such as the USA, which is packed with tech, biotech, social media and online winners, and an equally large range of potential future disruptors.

FTSE 100 may take its lead from commodities in 2022

Source: Refinitiv data

But if inflation runs hot and stays hot, then ‘real’ assets such as commodities, or paper claims on them via shares in mining and oil producing, may not be such a bad place to be. Nor may banks, which would welcome, at least to some degree, higher interest rates and a steeper yield curve, as they will help to fatten up net interest margins and thus profits (so long as higher borrowing costs do not weigh too heavily on customers’ ability to meet interest payments and return principal). The FTSE All-Share Banks index is up by 10% this year already and can point to an advance of more than 25% over the past 12 months, so the market is starting to look upon the banks more favourably than it has for a while.

Banking stocks are warming to steeper yield curves

Source: Refinitiv data

An index that gets 62% of its forecast profits and 51% of its forecast dividends from miners, financials and oils may therefore sound a bit unpredictable, indigestible or downright stodgy. But if inflation takes a hold, then the FTSE 100 might start to look more tempting.

Equally, if even modest interest rates slow the global recovery right down, or even tip it over into a recession, or a new viral variant does that job, then the UK’s heavyweight index could yet struggle to move past that May 2018 peak and continue to lag its global peers, many of whom already trade at or near new all-time highs, including America, France, Germany and India.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Alex Kitteringham

17/01/2022

Team No Comments

Daily Investment Bulletin: Brooks Macdonald

Please see below, a daily investment update received this morning from Brooks Macdonald – 07/01/2022

What has happened

Ahead of the key employment report for the US economy, yesterday’s trading session was mostly focused on finding an equilibrium after the volatility on Wednesday created by the Fed minutes. European indices were lower, recalibrating for the US moves the previous days however there were signs of US stabilisation with the headline and technology index both close to flat for the day.

US jobs report

The key event of the day will be the release of the US jobs report for December. Given the hawkish noises from the Fed in recent months the health of the economy is of critical importance as it will determine whether the Fed utilises the rate and tightening optionality it has created within the bond market. Economist consensus points to 400,000 jobs being created in December with attention also being paid to the average hourly earnings for signs of further wage inflation. Omicron-related disruptions are the big unknown so there may be more COVID noise within this data set than, say, November’s numbers. Wage inflation remains a critical component of the future inflation narrative, we have seen household savings rates decline in recent months as prices rise and we return to the ‘new’ economic normal, equally energy costs have risen, weighing on the consumer’s discretionary spending power. Sustained wage increases would enable the consumer to shoulder these higher costs otherwise consumer demand may struggle in the face of 2021’s heady inflation numbers.

ISM data

The Institute for Supply Management issued their survey of economic activity in the services sector yesterday. The ISM index is calculated based on surveyed businesses saying that economic conditions are ‘better’, the ‘same’, or ‘worse’ than the previous month. These surveys are diffusion indices meaning that a reading of 50 means that the average economic conditions of those surveyed was the ‘same’ as the previous month. Figures above 50 imply more ‘better’ responses and therefore expansion, readings below 50 imply more ‘worse’ responses and therefore contraction. Yesterday’s reading was 62 for December which, whilst strong, missed economist expectations of 67.

What does Brooks Macdonald think

Yesterday’s ISM services miss underlines the difficulty in estimating data with the impact of Omicron, should the same occur today, the US jobs report could have plenty of room for surprise. Given the importance of the report to the current swings in market leadership, this could lead to further volatility.

Please continue to check back soon for a range of blog content from us and some of the world’s leading fund management houses.

Alex Kitteringham

7th January 2022

Team No Comments

Weekly Market Commentary | UK booster campaign accelerated following Pfizer efficacy report

Please see below, the weekly market commentary from Brooks Macdonald, providing an update on monetary policy and the ongoing risk of the Omicron variant – received yesterday afternoon – 13/12/2021.

  • Equities rallied strongly last week as Omicron fears eased
  • This week sees the Federal Reserve, European Central Bank and Bank of England announce their latest monetary policy
  • Existing vaccines are shown to provide good protection against Omicron, accelerating the importance of booster jabs

Equities rallied strongly last week as Omicron fears eased

Last week saw an uptick in optimism around the Omicron variant with equities benefitting from a broad rally early in the week that favoured cyclical and tech sectors. The rally lost steam by the end of the week, but this is more of a reflection of the sharp gains on Monday/Tuesday rather than a sudden bout of fear.

This week sees the Federal Reserve, European Central Bank and Bank of England announce their latest monetary policy

This week could be pivotal for central bank policy, with eight of the G20 central banks reporting on their latest policy. Those eight contain the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England, with all of those banks expected to be considering a change to their monetary policy. Starting with the Fed, with the Consumer Price Index number last Friday in line with (elevated) expectations, an acceleration of the Fed’s tapering programme looks likely. Should the speed of asset purchase tapering double, for example, this would lead the current process to conclude in March and leave some room for the Fed to consider the timing of their first rate hike. This week’s Fed meeting will also provide the latest ‘dot plot’ of interest rate expectations so there is a lotto focus on. The ECB was expected to unveil a shift in policy towards rates guidance rather than liquidity guidance, in essence a slight pivot towards tightening policy. Given Omicron, this may be delayed until the New Year but it is a close call. In the UK, the Bank of England is expected to raise interest rates by 0.15% to 0.25% but again this is dependent on how the bank interprets the latest Omicron risk which has certainly grabbed headlines this weekend.

Existing vaccines are shown to provide good protection against Omicron, accelerating the importance of booster jabs

On Friday, the UK released a report looking at the efficacy of three Pfizer vaccine doses (two initial, plus a booster) which showed a c.75% effectiveness against symptomatic disease. The data underlined the importance to governments of the booster campaign and plans were announced to offer all adults in England a booster by 31 December. Omicron’s growth rate appears to be significantly higher than delta and this is causing governments to release some quite daunting predicted case numbers.

With each day that goes by, financial markets are building confidence that Omicron will be less severe than delta but that it will spread rapidly, leading to some nervous moments. Short term restrictions are likely across the world as governments buy time for their booster rollout. Looking forward though, investors are more sanguine.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Alex Kitteringham

14/12/2021.

Team No Comments

What President Biden could do to dampen oil prices (but probably won’t)

Please find below, an article regarding the global energy market and the options for the Biden administration. Received from AJ Bell, yesterday morning – 05/11/2021.

It is a case of so far, so bad for US President Joe Biden’s plan to force the oil price lower by releasing 50 million barrels of oil from America’s Strategic Petroleum Reserve (SPR). Fifty million barrels a day may sound a lot. But in global terms it is half a day’s demand and America’s entire SPR would meet worldwide oil demand for barely a week.

The Biden plan’s failure to make a dent in oil prices seems less surprising in this context. By contrast, the OPEC+ cartel can move oil markets, as its 2020 production cut and then gradual subsequent increases in supply can testify. OPEC and Russia are still producing less than they were before the pandemic, even as the global economy and energy demand recover, and the latest OPEC+ meeting (2 December) will be the next test of the cartel’s influence.

“Fifty million barrels of oil may sound a lot but in global terms it is half a day’s demand and America’s entire Strategic Petroleum Reserve would meet worldwide oil demand for barely a week.”

COP26 made quite clear the political and public will to move away from hydrocarbon as our prime source of fuel. You can therefore hardly blame Saudi Arabia, Russia and other leading producers for looking to monetise their oil assets while they can still do so.

“Demand for energy could therefore outstrip supply, with the result that hydrocarbon prices could remain firm, or even keep rising – at least unless COVID-19 rears its head again and depresses economic activity and oil demand in the process.”

In addition, alternative, renewable sources are not yet ready to take up all of the slack from oil and gas. Demand for energy could therefore outstrip supply, with the result that hydrocarbon prices could remain firm, or even keep rising – at least unless COVID-19 rears its head again and depresses economic activity and oil demand in the process.

That leaves advisers and clients with a quandary about what to do with oil stocks – and whether they should put profit over principle should oil and gas prices stay stronger for longer – and what to think about the global economy. High energy prices are a tax on consumers and a source of margin pressure for many corporations. If oil and gas rocket, there remains the chance that the indebted global economy could wobble under the strain, virus or no virus, just as it did when oil reached $147 a barrel in 2007.

Deep water

“The combined capital investment budgets of the seven Western oil majors – BP, Chevron, ConocoPhilips, ENI, ExxonMobil, Shell and TotalEnergies – looks set to drop to its lowest mark since 2005, as a percentage of sales.”

Unlikely as it may seem, oil and gas companies are listening to the political and public call for a shift to a greener, less carbon-intensive world. The combined capital investment budgets of the seven Western oil majors – BP, Chevron, ConocoPhilips, ENI, ExxonMobil, Shell and TotalEnergies – looks set to drop to its lowest mark since 2005, as a percentage of sales. In many cases, those budgets include renewable projects, too, so spending on oil production and exploration is by implication lower still.

Global oil majors continue to shy away from new investment in oil and gas fields

Source: Company accounts for BP, Chevron, ConocoPhillips, ENI, ExxonMobil, Shell and TotalEnergies, Marketscreener, consensus analysts’ forecasts

This can also be seen in the global rig count data provided by Baker Hughes (BHI:NYSE). On the previous occasions when oil traded above $80 a barrel, over 3,000 rigs were active. The current figure is barely half that.

Global oil rig activity is subdued relative to prior periods of $80-plus oil

Source: Baker Hughes, Refinitiv data

In the absence of a COVID-inspired setback, that again points to a possible supply/demand squeeze, especially as banks, insurers and many pension funds and managers continue to publicly declare their unwillingness to finance new oil and gas exploration projects.

Action points

“This is not to say President Biden has no options at all, as he seeks to manage the energy transition in the world’s largest economy and keep hard-pressed consumers on board as he and the Democratic Party prepare for the mid-term elections in 2022.”

This is not to say President Biden has no options at all, as he seeks to manage the energy transition in the world’s largest economy and keep hard-pressed consumers on board as he and the Democratic Party prepare for the mid-term elections in 2022.

  • The President could encourage oil and gas exploration with tax breaks or at least grant permission to pipelines that his administration has previously blocked, such as the $8 billion Keystone XL project. This does not seem likely, given his and his party’s commitment to the Paris Agreement and COP26.
  • President Biden could look to thaw relations with Venezuela and Iran, both of whom are currently locked out of global markets by US sanctions. Granted, it is hard to get a handle on potential Venezuelan output given the chaos that prevails there, but Caracas has produced two to three million barrels a day in the past. It is thought that Iran could double output fairly quickly from two to four million barrels a day if given the chance. Hey presto – an extra four to five million barrels a day in total. But geopolitics may rule out this option, as those sanctions are in place for a reason and the President will not want to look dovish on foreign policy ahead of those mid-term polls either.

If the President wants to curry favour, as he may well, who is to say he does not offer consumers some sort of subsidy or hand-out, so they can meet their fuel and heating bills? In a world where money printing and negative interest rates are accepted as normal, and austerity is political poison, anything is possible. But it might not be wise to expect oil consumption, or prices, to fall if such a vote-buying scheme is cooked up.

Please continue to check back for a range of blog content from us and from some of the world’s leading fund management houses.

Alex Kitteringham

6th December 2021.

Team No Comments

The Dirty Business of Greenwashing

Please see the below article received from AJ Bell late on Friday afternoon:

The 2021 United Nations Climate Change Conference, known as the COP26 summit, was held in Glasgow earlier this month and brought together heads of state, government leaders and important industry figures from nearly 200 nations. The main objectives of the conference were to restrict the level of global warming to 1.5 degrees Celsius above pre-industrial levels, and to achieve net-zero emissions by 2050.

The global finance industry has always been seen as an important factor in the drive to achieve climate change targets, and indeed the COP26 meeting included a dedicated ‘finance day’ where key players from governments, central banks and business discussed how the industry could rise to meet the ambitious challenges of the conference

Investment strategies where values are taken into account, often known as Environmental, Social and Governance (ESG) investing, have been available for many years, but they are now very well established as a strong market trend, with consumers around the world placing ever-larger amounts into ESG products. A recent FCA survey indicated that 80% of respondents wanted their investment portfolios to “do some good” as well as providing them with a financial return, and 71% wanted to invest in a way that “is protecting the environment”.

For their part, the UK authorities such as HM Treasury, the Bank of England and the Financial Conduct Authority (FCA) have been working on a number of initiatives. On the COP26 finance day, the FCA published its strategy on ESG, indicating its desired outcomes and the actions needed to achieve them.

The strategy codifies a number of items that the regulator has previously announced, with themes of transparency, trust, tools, transition, and team. The overarching objective is to support the financial sector to drive positive change, particularly in the transition to net zero emissions.

One potentially important piece of work is the discussion paper published by the FCA on 3 November – Sustainability Disclosure Requirements and Investment Labels. The European Union’s Sustainable Finance Disclosure Regulation (SFDR) contains a variety of provisions, including an obligation for financial advisers to take into account the ESG/sustainability preferences of clients as part of the advice process. SFDR was not implemented into UK law prior to Brexit, but the FCA has now launched its own Sustainability Disclosure Requirements which will cover much of the same ground as SFDR would have done.

Although the discussion paper is centred around the investment management industry, financial advisers are also referenced as a critical part of the value chain. The FCA’s proposals for advisers are not fully fleshed out in its paper, but a clear steer is given, so advisers should pay keen attention to the regulator’s moves in this area:

“…we recognise the important role that financial advisers play in providing consumers with sufficient information to assess which products meet their needs. We are also exploring how best to introduce specific sustainability-related requirements for these firms and individuals. Building on existing rules, a key aim will be to confirm that they should take sustainability matters into account in their investment advice and understand investors’ preferences on sustainability to ensure their advice is suitable. We will develop proposals on this in due course, working with Government…”

One core problem associated with the area of ESG investing is that of labelling. The FCA has a concern that there is the potential for ‘greenwashing’, where sustainability claims made by investment management firms do not stand up to scrutiny. There is a litany of different labels which can be confusing for investors and advisers looking for suitable products. These products can be variously labelled as ethical, ESG, SRI, responsible, green, impact and so on. With labels being an important driver of consumer choice, the FCA is looking to enhance trust in this area and develop a set of objective classifications for products. Its proposal is to classify them into five high-level categories, as follows:

  • Not promoted as sustainable’ – Here, sustainability risks have not been integrated into the investment philosophy of the product and there are no specific sustainability objectives.
  • Responsible’ – The impact of sustainability factors on risk and return has been considered. There should be a level of ESG integration into the product’s management, with evidence of ESG capabilities and resources from the manager, and demonstrable investment stewardship.
  • Sustainable – Transitioning’ – Products with sustainability characteristics, themes or objectives which do not yet have a substantial proportion of underlying assets that meet the sustainability criteria set out in the UK Taxonomy, but the expectation is that this proportion will rise over time.
  • Sustainable – Aligned’ – Products with sustainability characteristics, themes or objectives which have a substantial proportion of underlying assets that meet the sustainability criteria set out in the UK Taxonomy.
  • Sustainable Impact’ – Products with explicit objectives to deliver net positive social and/or environmental impact as well as a financial return.

Alongside these labels, the FCA has indicated its intention for firms to provide the most pertinent sustainability-related information via consumer-facing disclosure, in order for investors to be armed with all the information required for them to make a considered choice with their capital.

The FCA’s proposals are at a very early stage, but the direction of travel is fairly clear. ESG investment is growing at a rapid pace, driven by strong consumer demand and a significant push from regulators and governments around the world. In many ways, the industry remains somewhat fragmented and its labelling can be confusing for customers. With increasing choice from asset managers, and more advisers incorporating ESG products into their advice process to meet their clients’ preferences, the regulator’s moves to build trust make the industry clearer and more harmonised will be welcomed in many quarters.

Our Comment

When we first started to write about ESG around 18 months ago, we commented that we expected the regulator to react to the growing ESG trends in the investment world.

As you can see here, we were not wrong, it seems like this is the start of their push towards giving us guidelines around ESG investing.

It’s not a bad thing though. Greenwashing is a major issue in the industry. The more investors read and hear about ESG investments, the more they discuss it with their advisers and the more likely they are to want to invest in this way.

This unfortunately means that some non ESG approved investments won’t want to lose out on the investors money and will greenwash their way into getting people to invest with them.

The proposed new disclosure requirements will help to prevent this in the industry by making the labelling of investments more clear and transparent.

Keep checking back for more ESG related content and our usual market commentary from some of the world’s leading fund management houses.

Andrew Lloyd DipPFS

29/11/2021

Team No Comments

The Silicon Valley of Green Tech?

Please see the below article from Invesco:

The health crisis of 2020 created a synchronised economic depression requiring equally radical policy responses.

Europe’s response was the creation of a €750bn European Recovery Fund. However, rather than just deploy the capital, member states chose to focus on a Green Recovery and hence use the funds to address the existential threat of climate change. In practice this means the European Commission spending is being guided by the newly developed sustainable finance taxonomy. Promoting activities supportive of the environmental objectives of climate change mitigation and adaption:

  • Sustainable use and protection of water and marine resources
  • Transition to a circular economy
  • Pollution prevention and protection of biodiversity and ecosystems
  • It also contains criteria that ensure activities ‘do no significant harm’

European environmental legislation is not new. For years Europe has been a first mover in safety standards and best practices that become global standards, however, the European Green Deal marks a more dynamic approach. Taxonomy is the means by which the market will administer the carrot or the stick to companies. Winners will be those seen to solve the environmental crisis and losers will be those thought to be the cause.

This comes at a time of other changes to the investment landscape. Savers now demand their asset managers embed sustainability into allocation decisions. Fund regulation is playing its role too, through the deployment of SFDR this year, funds will be classified dependant on embedding ESG principles thereby making it easier for savers to pick compliant funds and avoid others. Lastly, the pandemic has created the political cover to deploy the significant European Recovery Fund to sustainable companies.

Combined these elements create the foundations for success. European companies that comply with taxonomy will see their cost of capital fall vs those that don’t.

The EU Recovery Plan is interlocked with the Commissions’ 2019-24 priorities that included the realisation that “Europe needs a new growth strategy that will transform the Union into a modern, resource efficient and competitive economy”. This is an inclusive plan with The Just Transmission Mechanism’s goal that ‘no person or place left behind’. At least E150bn is being made available to address socio-economic effects of the transition out to 2027 – a topic we discuss in greater detail in another piece (link to The Just Transition article). However, the real prize isn’t intra-Europe it’s global.

The goal of climate neutrality requires significant investment and innovation. If the transition is effective through taxonomy rewarding companies in the transition phase, we will grant our existing enterprises a competitive advantage though access to the cheapest capital. This will create more dynamism through more innovation and the creation of products, services and refreshed skilled jobs to achieve all the EU goals. Brown companies can become Green.

This idea of creating a pathway isn’t new. Europe has 2030 targets not just 2050, including transition plans for hybrid ahead of full electric vehicles, coal to gas electricity generation and developing blue hydrogen ahead of green hydrogen being viable. Through this approach we can incentivise European companies to allocate their existing cashflow towards green innovation as opposed to being forced into ever larger dividend yields.

Silicon Valley is perhaps the best example of the prize on offer. The birth of Silicon Valley was a confluence of skilled science-based research, education, venture capital and defence spending, particularly through the creation of NASA and the space race. The success and longevity of which is a function of being the first and with it a sustainable multiplier effect.

We are already starting to see the positive effects from this focus on transition. European oil companies lead the way in reallocating hydrocarbon cashflows towards greener alternatives (Total, Repsol, BP). In renewable energy, Europe is home to the leading wind turbine manufactures (Vestas, Nordex and Siemens Gamesa) and our power generators are world leaders in green production (Enel, EDP, Acciona). In technology, European semiconductor companies have leadership in Auto electrification (Infineon and STMicro). We also have expertise in building materials and renovation focused on reducing energy consumption (SaintGobain, Wienerberger, Kingspan). Europe’s paper companies are transitioning to sustainable packaging and biofuels (UPM) and Europe is home to worldwide leaders in the circular economy (Veolia and Suez). All are stocks that are held in portfolios across the team, to a varying degree.

Europe has grand ambitions and a once in a generational opportunity to steal a march on other continents through early adoption of regulation and technology. Through incentivising companies to innovate and embrace climate change Europe can become a global exporter of Greentech products and services to the rest of the world and enjoy the multiplier effect. Europe has the potential to achieve net zero and in doing so become the Silicon Valley of Green Tech including the vibrancy, jobs and sustainability that comes with it.

Please continue to check back for a range of blog content and regular updates from us.

09/04/2021

Andrew Lloyd

Team No Comments

Brooks Macdonald – Daily Investment Bulletin

Please see below an article received within the hour from Brooks Macdonald which provides a brief recap of the last week and also what could impact on markets this week:

As you can see from the above, politics could have a big impact on markets this week, especially with President Elect Joe Biden’s Inauguration on Wednesday. Also, they will be keeping an eye on this week’s European Central Bank (ECB) meeting.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Please keep safe and healthy.

Carl Mitchell – Dip PFS

IFA and Paraplanner

18/01/2021

Team No Comments

Invesco Weekly Market Performance Update

Please see this weeks Weekly Market Performance Update from Invesco which was published today:

The overall tone in forward-looking economic data remains broadly supportive, albeit with occasional disappointments, such as the EZ’s weaker than expected Composite PMI data. Beyond the (inevitable) strong post-lockdown bounce, however, the outlook remains less certain, reflected in continuing dovish comments from Central Banks and further fiscal support. Positive news on the vaccine front continues to come out, but widespread availability of a proven vaccine is likely to be a mid-2021 story rather than anytime sooner. Meanwhile on the virus front the situation remains mixed, with still high levels of new cases globally and the emergence of new clusters of inflections. But these generally have not been met by new aggressive lockdowns as authorities have so far reacted with only very localized and limited measures. With the Democratic Convention over and the Republican equivalent this week, the US Presidential and Congressional elections will increasingly become a major focus for investors as we move into the autumn. Another potential stumbling block for those looking for reasons to be more cautious on the outlook, even if history has shown that such concerns are often misplaced.

Global equities edged higher last week, with the MSCI ACWI in sight of its all-time high set in February. Gains were concentrated in the US, as all other major DMs saw modest declines. Small caps also fell. Value’s relative rally came to an abrupt halt, as Financials and Energy were weak and IT-related stocks boosted Growth. This weighed on UK stocks too.

Fixed income markets eked out modest gains across the board but are struggling to make sustained upward progress with yields at current levels and spreads in credit markets around their post-bear market lows. Government bonds were slightly ahead of credit, with IG ahead of HY.

The US$ recovered the previous week’s losses but remains close to its YTD lows against most major currencies. Commodities had a mixed week. Oil and Gold saw small declines, but copper appreciated.

• After a precipitous decline of nearly 34% in just over a month in February and March, the S&P 500 has staged a spectacular rally off its lows, rising just under 52% since then and making a new all-time high last Tuesday. It is now up 5.1% YTD.
• The recovery has surpassed anything seen in other major DM equity markets. Japan (Topix), Europe (MSCI Europe ex UK) and the UK (FTSE All Share) are still respectively -8%, -13% and -21% below their YTD highs. EM equities have fared somewhat better and are now just -1% below theirs.
• The US’s rally has not, however, been exceptional compared to previous bear market recoveries. Post the GFC crisis the equivalent rise was 49.4%, so broadly the same. The difference then, of course, was that this was after a multi-year bear market, which saw the market fall materially further than this time around (-56.8%).
• And a rising tide has not lifted all boats, at least not equally. The equally-weighted S&P 500 remains 7.8% below its all-time high, highlighting that the rally has been mega-cap led. Apple (+71%), the US’s first $2trn company, Microsoft (+36%) and Amazon (+77%), the three largest companies in the index, have all seen outstanding performance YTD. But there are still around 150 companies that are down more than 20%, while more than half the market has not made any gains this year.
• What has driven the rally? It’s been all about a re-rating. The 12m Trailing PE has risen from 23.4x to 29x (based on Datastream data), with earnings down -15%. At 22.3x the 12m Forward PE has only been surpassed during the TMT bubble. It’s been a spectacular rally, but one that has left the market not without its risks against the backdrop of an uncertain economic outlook and expectations of a strong earnings recovery.

Key economic data in the week ahead:

• A light week ahead on the data front.
• While not data, the key focus of the week in the US will be the annual (virtual this time) Jackson Hole Symposium. This year’s symposium is entitled “Navigating the Decade Ahead: Implications for Monetary Policy”. On Thursday attention will be on Federal Reserve Chairman, Jerome Powell, and his expected comments on the Fed’s ongoing policy framework review, while on Friday Governor of the Bank of England, Andrew Bailey, will also be speaking. Outside this, Tuesday sees the Conference Board Consumer Confidence reading for August, which is expected to show a slight improvement compared to July but remaining depressed relative to pre-virus levels. Initial Jobless Claims out Thursday are expected at 925k from last week’s above expectations reading of 1.1m. The week ends with the Fed’s preferred inflation measure, Core PCE Inflation, on Friday, which is expected to show a sharp rise (0.5%mom from 0.2%mom). This outsized gain is unlikely to have a material impact on the Fed’s medium-term inflation outlook given that the drivers of this outperformance largely reflect payback from virus-related declines previously.
• In the UK the Lloyds Business Barometer on Friday is expected to remain relatively weak compared to the robust PMI readings that we saw last week. Nationwide House Price Index on the same day is expected to see year-on-year growth increasing to 2%, up from 1.5% in July.
• No data of note from China, the EZ or Japan.

Please keep checking back for regular updates on the markets from a range of investment managers.

Andrew Lloyd
24/08/2020

Team No Comments

Protecting Mental Health in the post-Covid 19 workplace

Please see article below from Unum’s bWell – wellbeing newsletter received 12/08/2020

Protecting mental health in the post-Covid 19 workplace

Publish Date: 21/07/2020

The events of the past few months have affected everyone. Whether employees have been working from home, furloughed or key workers supporting others and keeping the country going, everyone has faced their own challenges. But as we come to terms with a new way of life, the impact on our mental health is still unclear. So how can employers help prevent mental ill-health in the post-Covid workplace?

Mental_Health_Resource_image_1200X675px_19.06.20 (1)-1

If businesses believe the threat’s been blown out of proportion, it’s not a view shared by the UK’s mental health organisations. In June, 62 agencies, including the Mental Health Foundation and Young Minds, wrote to Matt Hancock, the Secretary of State for Health and Social Care. Believing the effects of the unprecedented crisis are likely to be widespread and long-lasting, they asked him to address the “urgent need” to support our mental health and wellbeing.

As we emerge from lockdown, the mental health pressures on employees will change. After dealing with the challenge of social distancing and being separated from colleagues, the thought of returning to the office, getting back on public transport, or coming off furlough could be overwhelming. They are likely to experience a whole range of emotions from excitement and optimism to anger and anxiety. It’s important that employers recognise this and put plans in place to effectively support the mental health and wellbeing of their employees – both for now and the months to come.

Emerging mental health challenges

An ONS survey at the end of May found more than two-thirds (69%) of UK adults said they were very or somewhat worried about the effect of Covid 191. But whatever an employee’s situation, the challenges of the last months will have had an impact. Dealing with new ways of working or even not working at all, only make up part of the picture. People have also had to cope with their whole lives changing literally overnight. Juggling childcare and work, being separated from loved ones and dealing with financial pressures are just some of the issues they have had to face.

Feeling more isolated

Even before the pandemic, levels of loneliness were already worryingly high. Somewhere between 6% and 18% of the UK population reported often feeling lonely2– something which can have a significant impact on both mental and physical health. Since lockdown, the number of UK adults who say they often or always feel lonely has risen to 25%3.

Men have been particularly impacted. New research has discovered that 79% of men living alone are struggling with feelings of isolation while working from home, while 39% say their mental health has deteriorated. This increased in young men aged 18-30, where 40% said their mental health has been negatively impacted4.

With over 90% of the workforce5 saying they’d like to continue working from home at least some of the time after the restrictions are lifted, employers need to consider what this could mean for their employees’ mental health. While working from home avoids a potentially time-consuming commute and can help improve the work/life balance, it can be easy to feel detached and isolated. Employers should think about what measures they can put in place to prevent this happening.

Increased alcohol consumption

One of the side-effects of lockdown has been an increase in our alcohol intake. According to Action on Addiction, a quarter of adults were drinking more in June than before March6. Regardless whether this was a way of dealing with boredom, or raised levels of anxiety and stress, 15% of those who are drinking more said they were experiencing problems, including having issues with work. Employers need to be aware of these shifts in behaviour and ensure employees know where to turn if they’re struggling with drink.

Fear of meeting people

Since lockdown began, official messaging has emphasised the need to stay at home and avoid contact with people as much as possible. Even as restrictions ease and more places open, we’re told to stay alert against an invisible threat. The consequences of venturing out and leaving the safety of home can feel immense, especially to those either with underlying health issues or who have a vulnerable family member. Many employees may be worried about returning to work and being alongside colleagues again.

Fear of open spaces or being in a situation that feels unsafe – agoraphobia – was already common in the UK pre-lockdown, with an estimated 5 million sufferers, and one that affects approximately twice as many women as men7.

With large numbers of people spending a prolonged period of time at home, this figure is likely to increase. After spending so long in a safe and comfortable environment, many will fear the uncertainty of what their workplace will be like, being surrounded by people again and worry about how they’ll keep themselves safe. It’s vital that employers recognise this understandable anxiety and reassure employees that every precaution is being taken to ensure their safety.

Tips for employers and leaders

  • Encourage employees to be proactive and look after their own wellbeing, while reminding them that your door’s always open if they need support.
  • Look for any changes in their behaviour or signs that they might be struggling – early intervention can prevent a problem from becoming a long-term issue.
  • Consider mental health training to equip line managers with the skills to spot and support an employee who may be having difficulties.
  • Provide employees with access to trusted and reputable resources to keep them informed, but not overloaded with information.
  • Clearly communicate the safety measures that have been introduced to make the workplace Covid-19 safe and ensure employees understand the guidelines in place.
  • Encourage employees to limit how much they talk and share about the virus. The more it dominates the topic of conversation, the more it’s likely to increase fear and anxiety.
  • Keep talking to employees, be honest about your plans and acknowledge the concern that’s likely to exist.
  • Good work is good for mental health – provide employees with clear objectives and directions so they know exactly what is expected of them.
  • Highlight to employees what mental health support is available, such as an Employee Assistance Programme. Clearly communicate how they can access the service and emphasise it will be confidential.
  • Signpost employees to appropriate expertise provided by external organisations, such as Mind.
  • Consider how you can offer extra support to employees who may be struggling more, such as those with caring responsibilities or those that live alone.
  • Recognise employees that are doing a good job and reward their efforts.
  • Those that previously have had mental health problems may suffer a recurrence of their illness – be proactive and offer them support.
  • Encourage and facilitate volunteering opportunities for employees. Helping others is an effective way to boost mental health.
  • Support employees to develop their own skills, providing them with a positive focus and ensuring they look forward, rather than reflect on past difficulties.
  • Promote personal care plans for employees – urge them to take the time to think about what they can do for themselves to build resilience and boost their mental health.
  • Offer practical support and advice to employees around their journey to work, such as allowing employees to work flexibly, so they can avoid rush hour.
  • Encourage the use of video meeting tools like Zoom or Microsoft Teams so people working from home can keep in touch and see colleagues.
  • Keep monitoring the situation. Everyone is moving into unknown territory, so regularly check-in with employees to ensure the mental health support available covers all their needs.

Providing employees with the right support to protect their mental health and build resilience will be crucial for employers in both the short and long term as restrictions relax. There is a very real danger that a mental health crisis of unprecedented proportions could unfold. Employers acting proactively can prevent this happening.

The Coronavirus Pandemic has had a major impact on all of our lives and has affected everyone in different ways. As noted above the impact on our mental health is still unclear.

As we gradually emerge from lockdown and start to get used to a new normal, the challenges of returning to the office could be overwhelming for many people. It is important for employers to recognise this and have plans in place to support their employees.

The above article provides some helpful tips for employers and protecting their employees mental health in the workplace.

Please continue to check back for out latest updates and blog posts.

Charlotte Ennis

13/08/2020

Team No Comments

Business Blog – Commercial Property in your Pension – why?

Over the years a proportion of our clients use their pension assets to buy a commercial property.  Why would they do this?

The general benefits are as follows:

  • You do not pay any tax on rental income received into a SIPP (Self Invested Personal Pension)
  • No capital gains tax is paid on disposal of a commercial property from a SIPP
  • For ‘connected tenants’ (a business owner renting their pension’s commercial property to their own business) rent is generally a tax deductible business expense
  • SIPPs generally are not subject to inheritance tax
  • In insolvency the pension assets are normally out of reach of the trustee in bankruptcy

These are fairly standard benefits above; in the current situation a few useful ideas are as follows:

  • If your limited company owns the commercial property sell it to your pension to inject cash into your business to help with cash flow challenges and/or repay loans
  • If you own your own commercial property personally you could sell your property to your SIPP and if your business needs capital, make a Director’s Loan into your company (if viable)
  • By selling the commercial property you own to your SIPP you reduce your personal inheritance tax bill (if applicable)
  • In the past I have had clients sell their commercial property to their business to enable them to change business bank

When we think of commercial property you would normally think of offices, warehouses, industrial units and shops.  In addition, some stranger commercial property could be:

  • Sports stadium
  • Museums
  • Zoos

It is important to buy only commercial property with your pension, buying residential property could incur tax charges of up to 70%.  If you are not sure we can quickly get opinion on whether a property is commercial or residential for pension purposes.

The process for commercial property into a SIPP is as below:

  1. Validate if it is a potential SIPP investment (commercial property)
  2. Acquisition.  This involves good ‘due diligence’
  3. Ongoing management of the property, rent reviews, leases, insurance etc.
  4. Disposal of the property

During the acquisition stage you are likely to need the assistance of a few professionals, your accountant, a solicitor, a surveyor, the SIPP provider and a bank if you need a loan to assist with the purchase.  And obviously your IFA!

Due diligence is thorough and includes a report on title, information on the lease (is it suitable?), legal title, insurance, VAT, a copy of the EPC and search results (environmental searches too).

Loans to assist Purchase

If you do not have enough capital in your pension fund to buy the required commercial property you could borrow funds to purchase it.  Loans are restricted to 50% of the pension fund value.

For example, if you had £240,000.00 in your pension you could borrow a further £120,000.00.  Please note that you must factor in fees etc.

Connected Purchases and Connected Tenants

If you already own the property and you sell it to yourself this is a connected purchase.  You will then rent the property to yourself and you would be a connected tenant.

Connected party transactions must be completed on commercial terms.  You pay a commercial price for the property and you pay a commercial rent.  Normal due diligence is completed.

Investments

Rent paid initially can be used to pay any loan off asap if there was a loan used in the purchase.  Rent can then be invested in standard investment assets in your SIPP.

Investments can be funded by lump sums and on a regular monthly basis.  Building good liquid assets alongside your property assets is good practice.

Fees

In general terms fees for commercial property purchase in a SIPP and ongoing fees are more expensive than a standard property purchase.  This is because it is more complicated.

You also have the additional costs of your SIPP provider and your IFA in comparison with a standard property purchase.  Are the additional fees worth paying?  That depends on your circumstances and objectives.  Please take advice.

Summary

Whilst it is not for everyone buying commercial property with your pension could be useful, particularly now.  Some general benefits are that you take control of your working environment, property maintenance (and hygiene now) and if you have the space you could have a tenant too.

You can also join together with your life partner or business partners to buy commercial property with a few SIPPs.  You would own the property in proportion to your percentage paid.  This can get complex later, particularly at retirement.

Occasionally a SIPP may not be the right pension vehicle for your commercial property purchase.  A few of my clients prefer the additional benefits a SSAS provides (Small Self-Administered Scheme).   We won’t go into the SSAS benefits in this blog.

Retirement options include retaining the property and using the rent paid as part of your retirement income or selling the property.  If you are selling your business and retaining the property in your SIPP, you should also negotiate good long lease terms to the buyer of your business.

Right now, it could be difficult to get a valuation on a property, but business will gradually start returning to normal over the rest of the year – hopefully, a vaccine will speed things up!

Steve Speed

11/05/2020